Sunday, November 20, 2016

You can
always tell when the crowd gets long the VIX and ends up on the wrong side of
the trade. “The VIX is broken!” becomes
an oft-repeated refrain, as does “The markets are rigged!” and the usual list
of exhortations from those who are in denial.
The current line of thinking is that the world must be much more
dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is
actually down 31.4% since the election – ipso facto the VIX is broken.

While I
have more than a small soft spot in my heart for the VIX, I will be the first
to point that taking an Americentric, equity-centric view of the investment landscape
is dangerous and naïve. More often than
not, the issues that end up having a strong influence on the VIX are born on
foreign soil and/or in other asset classes.
Just look at the recent history in China, Greece, Italy, currencies
and commodities
to name a few.

When it
comes to looking at implied volatility indices as a risk proxy, I
prefer to survey the landscape across asset classes, geographies and sectors,
which is why I have developed tools such as a proprietary Macro
Risk Index (more on this shortly) that look at risk across asset classes,
geographies and sectors.

In the
graphic below, I have isolated a handful of volatility indices that cut across
asset classes and geographies to show how these have moved in the eight days following the
election. Note that Treasuries (TYVIX) and the euro (EVZ) have been
trending steadily higher since the election as uncertainty related to the
future of inflation and interest rates in the U.S. has risen, while the
relationship that the Trump Administration will have with our NATO allies and
the European Union is also somewhat murkier.

Gold implied
volatility (GVZ)
initially moved sharply higher following the election, but has since receded,
as gold prices fell swiftly after the election, but have since stabilized. Meanwhile, emerging
markets saw dramatic selling immediately following the election, but have
bounced during the course of the past week as fears and implied volatility (VXEEM) have
subsided. Last but not least, the moves
in crude oil and crude oil implied volatility (OVX)
have been the least remarkable of the group

[source(s): CBOE, VIX and More]

In aggregate,
the picture is a mixed one in terms of implied volatility, risk and
uncertainty. As is often the case, risk
has become elevated in certain asset classes, such as Treasuries and the euro. In other areas, such as U.S. equities – and their
VIXian barometer – there are winners and losers, with the result that a net
bullish outlook has moved equity implied volatility lower. This is not to say that a Trump
Administration – whose cabinet members and policy priorities are largely
unknown at this juncture – will not increase risk in some areas. More risk is certainly on the horizon and if
history is any guide, an Americentric, equity-centric view of the investment world
is likely to be slow in identifying those risks.

Post-Election Risk Trending Up in Treasuries and the Euro, Down in U.S. Stocks

You can
always tell when the crowd gets long the VIX and ends up on the wrong side of
the trade. “The VIX is broken!” becomes
an oft-repeated refrain, as does “The markets are rigged!” and the usual list
of exhortations from those who are in denial.
The current line of thinking is that the world must be much more
dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is
actually down 31.4% since the election – ipso facto the VIX is broken.

While I
have more than a small soft spot in my heart for the VIX, I will be the first
to point that taking an Americentric, equity-centric view of the investment landscape
is dangerous and naïve. More often than
not, the issues that end up having a strong influence on the VIX are born on
foreign soil and/or in other asset classes.
Just look at the recent history in China, Greece, Italy, currencies
and commodities
to name a few.

When it
comes to looking at implied volatility indices as a risk proxy, I
prefer to survey the landscape across asset classes, geographies and sectors,
which is why I have developed tools such as a proprietary Macro
Risk Index (more on this shortly) that look at risk across asset classes,
geographies and sectors.

In the
graphic below, I have isolated a handful of volatility indices that cut across
asset classes and geographies to show how these have moved in the eight days following the
election. Note that Treasuries (TYVIX) and the euro (EVZ) have been
trending steadily higher since the election as uncertainty related to the
future of inflation and interest rates in the U.S. has risen, while the
relationship that the Trump Administration will have with our NATO allies and
the European Union is also somewhat murkier.

Gold implied
volatility (GVZ)
initially moved sharply higher following the election, but has since receded,
as gold prices fell swiftly after the election, but have since stabilized. Meanwhile, emerging
markets saw dramatic selling immediately following the election, but have
bounced during the course of the past week as fears and implied volatility (VXEEM) have
subsided. Last but not least, the moves
in crude oil and crude oil implied volatility (OVX)
have been the least remarkable of the group

[source(s): CBOE, VIX and More]

In aggregate,
the picture is a mixed one in terms of implied volatility, risk and
uncertainty. As is often the case, risk
has become elevated in certain asset classes, such as Treasuries and the euro. In other areas, such as U.S. equities – and their
VIXian barometer – there are winners and losers, with the result that a net
bullish outlook has moved equity implied volatility lower. This is not to say that a Trump
Administration – whose cabinet members and policy priorities are largely
unknown at this juncture – will not increase risk in some areas. More risk is certainly on the horizon and if
history is any guide, an Americentric, equity-centric view of the investment world
is likely to be slow in identifying those risks.

Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

Reviews of VIX and More

About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.